Leading in the Clean Energy Deployment Challenge

Building a Clean Energy Economy Takes More Than R&D

By Bracken Hendricks and Lisbeth Kaufman
Posted on December 15, 2010, 9:00 am

There’s a growing chorus in Washington in favor of robust clean energy R&D. Policymakers of all political persuasions are increasingly calling for more funding for research, joined by advocates as divergent as the Brookings Institution and the American Enterprise Institute. But while public funding for R&D is without a doubt a key piece of the clean energy equation, it is not the only one.

Clean technologies face a host of barriers in energy and financial markets that have nothing to do with technological readiness. By overemphasizing next-generation innovation, these champions risk obscuring the tremendous opportunity to increase commercial investment in existing clean technologies today. To bring low-cost renewable and efficient energy to consumers requires a focus not only on new research, but also on overcoming barriers to deployment through market reforms, lowering the cost of long-term capital for project finance, and improving infrastructure planning and development.

The calls for boosting clean energy R&D funding are welcome and long overdue. They represent a healthy shift and a move away from fruitless politicization of climate science. Further, the impulse to support economic innovation by driving down the cost of clean energy alternatives is a correct and timely addition to the debate.

But the problem with overemphasizing R&D is that it encourages an overly simplistic solution to the very real market barriers slowing the clean energy economy’s development. Simply put, R&D boosters have the right diagnosis but an incomplete prescription for the cure. Building a low-carbon economy depends first and foremost on making clean energy cheap. But clean energy’s cost won’t be cut solely by breakthroughs in the lab.

Smart tax policies, regulatory reforms to increase access to the grid, new contract structures and bonding, and coordination with state and local governments and utilities on everything from bonds to credit enhancements to billing systems all need to be in the mix if we’re to expand the roll of clean technology in meeting America’s economic and energy needs.

Moving clean tech rapidly down the cost curve depends on dramatically increasing capital investment, expanding market demand and consumer confidence, and improving industrial processes and disruptive new business models. Reaching these goals will take more than a focus on early phase research in advanced clean energy.

Looking at the whole deployment picture

During recent debates in Congress over comprehensive climate legislation, cap-and-trade provisions often got all the attention. The result was that other key market-creating policies were marginalized as mere “complements” to the real debate over pricing carbon. The Center for American Progress strongly supports regulating carbon emissions and accounting for the real costs of pollution. But we have advocated this policy within the context of a more comprehensive clean energy investment agenda that recognizes the importance of a near-term deployment focus. A single macroeconomic price signal to drive up the cost of pollution though cap and trade will never be sufficient to fix our broken market for energy. Likewise, an overemphasis on technology R&D, while important, can just as surely obscure the need for more comprehensive policies that fix America’s broken energy markets.

Stressing early phase R&D without focusing on the broader context of deployment risks overlooking the real market barriers keeping clean energy costs high. Simply investing more heavily in early phase research and development of clean energy technologies without fixing these underlying barriers will in the end have limited success in changing our nation’s carbon footprint or in building viable new industries and enhanced economic competitiveness. We need to establish predictable demand, reliable access to capital for project finance, and mature scaled markets.

What’s needed most today is an industry-creating policy that brings the resources of capital markets to bear in commercial deployment of clean energy.

Recognizing clean energy market barriers

Technology advocates frequently refer to Moore’s Law, named after Intel co-founder Gordon Moore. He predicted an exponential growth rate in technology performance, with the doubling of processing speed, computing power, and memory year-over-year on a sustained basis. We’ve grown accustomed to these dramatic changes in IT and communications.

Many energy experts anticipate similar declining prices and dramatic productivity gains in clean energy. But it is critical to remember that Moore’s Law is not a law of physics. It is a law of markets. Capturing this opportunity to make clean technology cheap requires a clear assessment of the real barriers in the market today.

What Gordon Moore commented on in computing was the growth of an innovation-led industry firing on all cylinders. The virtuous cycle of investment started with government labs committing to basic science and technology R&D. It was accelerated by Department of Defense procurement, establishing stable demand and sustained early investment. This early public commitment then continued as private investment took over with the growth of a consumer electronics industry. Private-sector investments then brought these innovative technologies to scale through a combination of both radical technological innovations and much more simple process improvements. The combined public and private investments created tremendous public value while giving birth to a brand new industry. Predictability in the market made this possible. That is just what is missing for clean energy today.

Misdiagnosing the actual barriers to a clean energy industry at scale can result in failing to take the right short-term measures to accelerate technology adoption. The Breakthrough Institute, for example, has mistakenly made the case that “clean energy technology is not ready for widespread adaption.” This implies that clean energy is currently more expensive than fossil fuels principally because of weaknesses in the technologies themselves, making them “incapable of standing on their own in the marketplace.” This problematic conclusion therefore leads them to home in on a solution based on technology innovation.

If early computing pioneers had taken this advice, and focused only on perfecting microprocessors before driving their early innovations into commercial application, we would still be waiting for cell phones and laptops to emerge full blown from the laboratory. Instead, they took a different route built on supplying products and increasing demand, and incremental gains could build steadily, driven by growth in private investment as markets grew to scale.

Market innovation turns out to be just as important to driving down costs. For instance, even with proven and effective clean energy technologies it is tremendously difficult to finance renewable energy projects, which drives up capital costs. The lack of a comprehensive clean energy policy likewise has driven uncertainty in demand, injecting further costs into the market. Meanwhile, market barriers in real estate and electricity markets reduce transparency on consumer benefits suppressing investor interest and raising costs still higher.

Together, these market barriers are slowing progress on technologies. They will just as surely slow adoption of future breakthroughs as well.

Instead, a better short-term approach is to focus on deployment by establishing predictable demand, low-cost financing, and a supportive market environment. This approach increases technological change by vastly increasing the scale of investment from many sources including public early phase R&D and government procurement but also in private markets across the economy, in real estate, electricity, infrastructure, and information technology.

The policy debate should focus on this more comprehensive approach to near-term innovation instead of concentrating on perfecting new technologies through research and public spending. Policymakers should absolutely embrace robust R&D investments but look to finance large-scale deployment of already existing clean energy technologies. These deployment investments will serve as fundamental building blocks of a robust and profitable clean energy industry and accelerate further research, increasing the pace of change.

The President’s Council of Advisors on Science and Technology, or PCAST, estimates that America must invest an additional $12 billion annually in R&D to lead in clean energy technology, with a further $4 billion in public funding to promote deployment. This is a great first step toward building a clean economy. It is only a fraction, however, of the overall need. Bloomberg New Energy Finance estimates that by 2020 clean energy technologies will be a $500 billion global market annually.

The public sector cannot manage these investment levels alone. But at the same time, private commercial investors face major regulatory and market barriers to making this leap. Overcoming these obstacles is essential for the growth of the industry that analysts anticipate. The United States must implement new policies that draw both private and public capital to clean energy technology deployment.

Catching up in the clean energy race

There’s also an imperative to get our policies right to remain economically competitive in the global clean energy market. The United States has managed to finance R&D at low but consistent levels in recent years, but our competitors in countries like China, Germany, Korea, and Japan are manufacturing and deploying existing clean technologies by creating well-structured domestic market demand. They are taking the lead in the clean energy race. Without a strategy to build our markets, we will invest in research, while they capture global production.

For instance, China is now the largest manufacturer of wind turbines and solar panels—technologies that were created in the United States through R&D investments. China is attracting billions of dollars from multinationals looking to manufacture and deploy all sorts of clean technologies. The Clean Energy Economy and The Pew Charitable Trust report that this success came out of China’s enormous investments in clean energy deployment. With a $34.6 billion budget, they are the world’s biggest clean energy investor.

The United States, while still in second place with $18.6 billion in total spending, lags behind many other G-20 countries relative to the size of our economy and total energy use. As Energy Secretary Steven Chu said in December 2010, this is our “Sputnik moment.” If we don’t want to fall further behind we must invest in clean energy technology deployment now. We need to lead in innovation and in creating stable markets for those inventions.

The United States is in part falling behind in the clean energy race because fossil fuels are so heavily subsidized. This makes them artificially cheap. The Environmental Law Institute finds that fossil fuels received $72.5 billion in public benefits from 2002 to 2008 through government spending and tax breaks alone. That’s more than six times the $12.2 billion that traditional renewables received. Market-creating policies can help clean energy reach economies of scale, leveling the playing field in the face of fossil fuel’s unfair advantages.

Striking the right balance

Policies that expand the market for clean energy alternatives are essential to drive deployment in the near term. These urgently needed measures include regulatory tools that create more certain and predictable demand like renewable energy standards, improved building codes, and appliance standards. They also include new tools to support project finance.

Policies that focus on manufacturing and deployment have been successful in directing funding toward clean energy projects and lowering the risk of investment, and ultimately the cost of clean energy. These include the Treasury Grant Program (Sec. 1603) recently included in the president’s tax compromise, the Manufacturing Tax Credit for U.S. Clean Technology (48c), and DOE Loan Guarantee Programs. These programs need to be extended and expanded, and additional programs such as feed-in tariffs and a clean energy deployment administration, or CEDA, must be added to the policy suite.

Building markets also depends on a renewed commitment to infrastructure. This commitment can range from a smart electricity grid and automobile charging stations to public funding of Science, Technology, Engineering, and Math, or STEM education; and (yes) enhanced support for early phase R&D through the national labs; the Advanced Research Projects Agency-Energy, or ARPA-E; and the private sector.

Conclusion

The economics and politics associated with clean tech will improve as the clean energy industry matures and more technologies are deployed on a larger scale. Clean energy can more closely follow the example of the PC industry if we recognize the real barriers to industry growth in today’s energy markets. The PC industry did not wait for the smallest, fastest chip. It deployed early stages of the computer to grow a market, and it improved the chip as market demand increased. Using today’s technology we can make tremendous strides. New industries will be born as new technologies are deployed, markets grow, and market risks decline.

The United States should adopt a balanced strategy to make clean energy cheap, easy, and accessible. In doing so, it can bolster the economy, create jobs, and improve economic competitiveness all while reducing pollution. Within coming decades, the United States must make hundreds of billions of dollars in large-scale deployment of clean energy to be a leader in this emerging industry. Reaching this goal, especially in the absence of overarching climate policies, will require thoughtful policies not only to invent new technologies but to make better use of the tools we have at hand.

Advocates of expanded public investments in R&D are on the right track and a welcome voice in the national debate. But a simplistic adherence to this prescription could prolong delay as American industry suffers. We can do much today with smart use of the tax code, regulatory reforms, as well as direct federal investments and partnerships with states, local governments, and private industry. If we fail to meet this challenge quickly our competitors in Europe, Asia, and developing countries will be glad to meet the energy needs of Americans as well as new customers around the globe. For U.S. workers and consumers there is no substitute for American leadership in meeting the clean energy deployment challenge.

Bracken Hendricks is a Senior Fellow and Lisbeth Kaufman is a Special Assistant for Energy at American Progress.